Put not your faith in experts – why you can’t trust bankers on the economy

If you’re like me, the Business section of the newspaper is pretty much impenetrably unreadable.

Not that I don’t try to read it. And not that I don’t occasionally learn things. But most of the time, I come away baffled, as though I’d just read a play-by-play summary of a cricket match.

Like for instance this story from last week about the energy company everybody loves to hate:

Enbridge Inc. moved forward with a sweeping restructuring plan as it seeks to accelerate dividend growth and finance billions in new pipeline projects.

The Calgary-based company said Friday that Enbridge Income Fund would buy $18.7-billion in assets, including the Canadian portion of its mainline oil-shipping network and a patchwork of regional oil sands lines, as well as some renewable energy assets. The deal, known as a drop-down, also includes the assumption of $11.7-billion of debt associated with the assets, Enbridge said.

The move will lower the company’s cost of capital as it advances a $44-billion portfolio of new projects over the next decade, Enbridge said.

It follows an announcement by the company, last December, that it would transfer ownership of $17-billion of assets to the fund and boost its quarterly dividend by 33 per cent. Enbridge expects per-share dividend growth to average 14 to 16 per cent annually from 2016 to 2018.

No matter how many times I read it, my eyes keep glazing over at key parts, and the meaning of what’s happened here remains totally obscure. My best effort at deciphering it is: “Enbridge announced today that by rearranging its piles of money, it has (somehow) created more money! And also more debt. Pipelines!”

Or, as South Park so succinctly put it:

Some of the commentary by alleged “experts” in the article gives me the impression that this move smacks of desperation, but I’d be hard-pressed to explain why.

That’s because the business news is written in such a way as to be unintelligible to the average reader. Granted, this is in part because finance is complex and most people are unacquainted with a lot of the terms of the trade. But I think that the financial types also like the mystique around their profession. After all, it’s pretty handy to be able to push for destructive and unpopular measures by gesturing towards reasons which are incomprehensible to the masses, and saying reassuringly, “We’re the experts – trust us!”

Appeals to authority are rarely so naked, of course – they’re often no more ostentatious than name-dropping the prestigious firm that a quoted expert works for, or the exalted title the expert possesses. It’s implicit that this is somebody whom we ought to trust, somebody who understands these issues intimately.

This aura of authority is allowed to exist in the absence of any fundamental underpinning. For instance, the above-linked article quotes the ratings agency Standard and Poor’s on the Enbridge deal (they think Enbridge might be stretching themselves) – and to the casual reader, who may be aware of the ratings agency, that may sound pretty authoritative. But Standard and Poor’s, along with the other major ratings agencies, has serious credibility issues. Earlier this year, they were fined $1.4 billion by the US Justice Department for the role they played in creating the American financial crisis of the last decade, and then-Attorney-General Eric Holder had this to say:

On more than one occasion, the company’s leadership ignored senior analysts who warned that the company had given top ratings to financial products that were failing to perform as advertised.

As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business. Now, while the strategy may have helped S&P avoid disappointing its clients, it did major harm, major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.

In other words, we literally cannot trust this particular expert – they have a glaring conflict of interest, and have in the past lied about their analysis in order to keep their paying customers happy. Perhaps their true opinion of the Enbridge deal is that it’s disastrously bad, but because Enbridge is a paying customer of theirs, they keep their criticisms extremely mild. On the other hand, perhaps they’re giving us their real, unvarnished opinion. The point is, because the potential for conflict of interest exists, we can’t know what motivates their judgement.

And in the aftermath of the US financial meltdown of a few years back, we have ample evidence to back up the assertion that finance “experts” often express opinions which support the positions of the people who pay them, even if they’re very well aware of evidence undermining their position. Conflicted experts are hardly rare in many fields, which is one of the reasons that appeals to authority are so problematic. But I’d be hard-pressed to think of a more conflicted group of experts than banking executives.

Consider, for instance, Scotiabank CEO Brian Porter’s April speech at the bank’s annual general meeting.

Porter took the occasion to make the case for greatly increased investment in Canada’s energy sector, and in particular in several pipeline projects that TransCanada and Enbridge have proposed. (There’s a good long video of him speaking at that link – but if you do watch, get ready for that eyes-glazed-over feeling!)

Porter called Canada’s inability to export meaningful quantities of energy efficiently a “significant constraint” on the price of Canadian energy exports and the growth of the economy.

“Without the ports and pipelines needed to deliver Canada’s energy products globally, importing nations will source their energy supply elsewhere. This lack of sufficient energy infrastructure creates significant opportunity costs. We risk seeing investors shift their capital – as well as the job creation and economic growth that comes with it – to other markets,” said Porter. “Gaps in our infrastructure will have long-term consequences for our economy and for all Canadians.”

Without new pipeline capacity, Porter warns tax and royalty revenue from energy and energy-related businesses will be negatively impacted, regardless of commodity prices.

According to Porter, everybody would benefit – the economy would grow, good well-paying jobs would be created, aboriginal communities would see greater employment and funding.

One main beneficiary of such a policy whom he didn’t mention, however, was Scotiabank.

Scotiabank is one of the largest investors in the tar sands out of all the Canadian banks, and they also make a great deal of money facilitating investment in tar sands extraction projects. In fact, on the very same day that Porter gave his AGM speech, Scotiabank was also hosting an investment symposium for more than ninety oil and natural gas companies. From the promotional material:

Investor presentations will be complemented by panel discussions with LNG proponents, transportation company executives, and keynote addresses by TransCanada Corporation president and CEO Russ Girling and Peter Tertzakian, chief energy economist and managing director with ARC Financial Corporation.

“Canada is a great market to invest in the oil and natural gas industry, and the CAPP Scotiabank Investment Symposium is a key forum for investors to explore investment opportunities in our sector, which remains strong despite the current economic environment,” said CAPP president and CEO Tim McMillan.

“The symposium will highlight our industry’s focus on cost competitiveness and also highlight our plans to expand markets for both Canadian oil and natural gas,” McMillan said. “Naturally, we will also demonstrate our industry’s continued commitment to operating safely and in an environmentally responsible manner.”


Note also that two TransCanada execs were giving the keynote addresses – perhaps at the very same time that Porter was extolling the benefits the TransCanada Energy East pipeline could bring to Ontario.

For Porter to present himself as some kind of objective expert advocating an objectively-needed policy change is ludicrous – but in the business press, I couldn’t find a word about the blatant conflict of interest inherent in this position.

Perhaps because this literally happens all the time.

For instance, after a widely-reported story Wednesday on US investors’ increasing skittishness about the obviously overvalued Canadian real estate market, yesterday CIBC had its chief economists release a report downplaying fears of a bubble situation:

“Averages can mask a lot of things. Provincially and even at the city level, very different trends are occurring within the housing market that makes using a blanket national average useless,” [Benjamin] Tal and [Andrew] Grantham write in a note to clients.

The economists say it is still possible for the Canadian housing market to “overshoot” – with condos in Toronto and Vancouver particularly vulnerable to a price correction – but that the market has not been tested yet by higher interest rates.

“Comparing Canada to the pre-crisis U.S. market is not only wrong but also irresponsible,” they write.

“The market will adjust, but given the many faces of the market, the adjustment will not be uniform. It will impact different segments at different intensity, and therefore on aggregate be smoother and take longer to fully unload.”

Shorter CIBC: “Hey, don’t worry about it! Math is hard, and numbers are misleading, but trust us – we’re in for a pretty soft landing.”

Which is a very convenient conclusion for CIBC to come to. The bank is, after all, a major mortgage lender. Their 2014 year-end report (PDF) states that they held nearly $160 billion in mortgage loans (see page 29), many of those loans undoubtedly on grossly overvalued properties in Vancouver and Toronto. The value of those loans won’t go down if housing prices drop, and CIBC has every incentive to encourage even more people to lock into massive mortgages before the music stops.

Like Lee Robbins:

Growing up in subsidized rental housing in Victoria, Lee Robbins always dreamed he would own a house by the age of 30.

He reached that goal two years ago when he and wife Cara bought their dream home: a 1960s three-bedroom, two-storey house within biking distance of his workplace.

Like many people in their 20s and 30s buying real estate in costly cities, they had to stretch financially. Closing costs and other fees cut into a modest profit from the sale of their condo, so Mr. Robbins took $12,000 from his line of credit to put together the minimum 5-per-cent down payment, leaving the couple with a $438,900 home – and $430,000 in debt.

This is the story of so many young people in Canada – hopelessly indebted to banks and credit card companies. Their pain is CIBC’s gain – the more mortgages that Canadians buy, the more banks like CIBC profit.

That same article goes on to cite some horrifying statistics:

On average, Canadians had credit-market debts worth a record 163.3 per cent of their after-tax incomes in the fourth quarter of last year, up from about 110 per cent in 2002. Meanwhile, income growth has failed to keep pace and the household savings rate has dwindled to just 3.6 per cent, a near-five-year low…

Residential mortgage debt in Canada has more than tripled – to a record $1.3-trillion from $423-billion in 2000…

Prof. Milevsky, at Schulich, estimates one to two million Canadians are deeply in debt, spending as much as half their income on debt payments alone…

More than half of Canadians would find it tough to meet their financial obligations if their pay was delayed by just a week, a poll last year by the Chartered Professional Accountants of Canada found. And more than half don’t save on a regular basis.

Many people in this country are perched precariously on the edge of collapse. It would only take a minor life crisis to leave many Canadians unable to make their next debt payments – and a critical mass of such non-payments would be the trigger to a very quick collapse in housing prices.

But CIBC’s experts blithely reassure their clients that the downturn, if it comes at all, will be a relatively smooth and leisurely one, giving them plenty of time to react. That CIBC stands to profit from fools taking their advice is, apparently, not mentioned in the report.

And again – the people who write up these stories know full well that bankers have major credibility issues. Almost every major American bank has paid out billions of dollars in recent years after being found guilty of varying kinds of fraud in the lead-up to the financial crisis – fraud committed against their own customers. And this type of dishonesty isn’t confined to the United States – in recent months we’ve seen high-profile examples of similar activity in the UK and Switzerland.

I’m not alleging any criminality on the part of Canadian banks, to be clear – the two examples I describe are totally legal. But they also betray a disingenuousness which is hard to deny. As well, the pattern of behaviour of major financial institutions around the world demonstrates clearly that many banks believe they have a lot to gain by deceiving their customers and the public at large, and Canadian banks may well be susceptible to these kinds of pressures.

I first became interested in financial news in 2008, as the financial crisis was unfolding in the US. Since then, although I haven’t ever quite managed to beat back the thicket of technical language surrounding financial discourse, I have learned one lesson very clearly – never take the confident proclamations of experts at face value. There is a lot of money changing hands in this game, and a lot of people have vested interests which aren’t immediately apparent to the public.

The appeal to authority is one of the most pernicious rhetorical devices. When confronted with a complex subject about which we know little, it is natural to look to experts for advice on how to interpret trends and events. But there are many reasons not to blindly trust experts – and when it comes to banking and finance, the conflicts of interest run so deep that we would probably be better off getting advice from anybody but a banker.


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During the GFC of ‘8-’09, I mused about what sector(s) of the ecnoomy would experience the next bubble due to the great reflation that was sure to follow. So, higher education became one such sector where easy credit worked its dark magic.The truly sad part about this mess (aside from the financial burdens it is causing) is that people are now attacking the very concept of higher education. I’m hearing it more and more. For the most part, the critics don’t seem to understand what higher educate is really for, particularly outside of highly specialized fields such as medicine, law and applied sciences. It would really worry me if society eschewed higher education because the benefits are not directly and immediately linked to a certain type of job. It’s another case of mismatched expectations, currently magnified by an ecnoomy in transition.

    I hear you, Arthur – I went to school to learn, first and foremost, and I found myself in the minority. It certainly helped that I won a pretty big scholarship and didn’t have a looming cloud of debt hanging over my head, but again there I was in the vast minority. A lot of folks I know from university who got liberal arts degrees like I did aren’t even trying to work in their fields, because there’s no jobs and they owe tens of thousands. So what incentive is there to learn about something you’re passionate about, unless that something happens to be the esoteric mysteries of derivatives? And then on top of all that is the crapification of higher education, whereby tenure-track positions are being phased out and an increasingly precarious teaching workforce is newly sensitive to what university administrators want to see taught.
    To be honest, I don’t think I would recommend higher education to today’s high school graduates. Which sucks. I feel nostalgic for something I never experienced – a quality affordable liberal arts education that was valued by society.

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